UP's UDAY bonds sale hangs in balance with bankers unlikely to take exposure to unknown security

The state government, led by chief minister Akhilesh Yadav, has called for bids from investment bankers on March 10.

The state government, led by chief minister Akhilesh Yadav, has called for bids from investment bankers on March 10.

MUMBAI: Bond markets may have passed the government’s fiscal deficit test last week with assurance on the state sticking to the fiscal deficit road map, but a more crucial test is looming this week with Uttar Pradesh poised to find out the reception for its Rs 13,000-crore offer of the so called UDAY bonds.

The state government, led by chief minister Akhilesh Yadav, has called for bids from investment bankers on March 10 as it attempts to be the first off the block to clean up the power sector mess that is crippling producers as well as industry which are struggling without sufficient power.

Investment bankers will have to submit to the state government on the likely yields that they would be willing to sell those bonds at and also given an underwriting commitment for those bonds, said two people familiar with the plans. Last week, the UP government had to scrap the bids since it fell on the Union Budget day.

“The state power corporation has floated a tender seeking bids from investment bankers with condition to underwrite the entire bond amount,” said a banker who did not want to be identified. “The tender has also asked investment bankers to give annual yield at which they would acquire the bonds in their books.”

State electricity boards have run up a debt of more than Rs 4 lakh crore as they subsidised power to farmers and weaker sections of the society. That left them with little ability to buy power to feed industry. Now, the government has come up with a scheme, UDAY (Ujwal DISCOM Assurance Yojna), where the states would take threefourths of distribution companies’ debts on their books and pay banks through bond floats.

Bankers believe that the state may have to yet again postpone with no rating yet available and bankers unlikely to take exposure to an unknown security when the fiscal year is close by.

There are about eight states that have so far agreed to the proposal named UDAY, including Punjab, Gujarat, Jharkhand, Uttar Pradesh, Rajasthan and Chhattisgarh. Tripura and Manipur are likely to join soon.

Bond investors about Rs 60,000 crore worth of bonds to be sold by the states under the scheme that pushed the yields up in the past few weeks. But the central bank has said that it would temper the flow of such bonds and smoothen out its impact. “UDAY Bonds, if and when issued as non-SLR state Development Bonds, will not hit the market but will be through private placement,” the RBI has said.